Several new tax credits took effect in 2006, intended to promote energy savings.

ENERGY EFFICIENT PERSONAL RESIDENCE CREDIT

A $500 personal tax credit is available for energy efficient improvements and property purchases for a principal residence. The credit is equal to 10% of qualifying energy efficiency improvements plus the cost of residential energy property expenditures. Qualifying improvements include items such as insulation, exterior windows, skylights and doors. Residential energy property includes natural gas, propane, or oil furnaces; hot water boilers; advanced main air circulating fans; heat pumps and central air conditioners.

ENERGY EFFICIENT RESIDENTIAL PROPERTY CREDIT

Homeowners can also qualify for a 30% tax credit by installing solar hot water, electricity-generating solar equipment or fuel cell property. The maximum credit is $2,000 for the solar equipment and $500 for each .5 kilowatt of fuel cell capacity. This credit is not available for equipment used to heat swimming pools and hot tubs.

ALTERNATIVE FUEL VEHICLES

Congress replaced the $2,000 deduction on the purchase of hybrid vehicles (like the Toyota Prius) with a tax credit that could be as high as $3,400. Credits are also available on vehicles using qualifying advanced lean-burn technology and on fuel cell powered and alternative fuel vehicles. Purchase (or lease in some instances) must be after 2005, but the credits vary as to cut-off date – which can range from 2009 to 2014.

ENERGY EFFICIENT NEW HOME CONSTRUCTION CREDIT

Contractors are eligible for a credit of $2,000 per home for new construction meeting a 50% energy efficiency standard. The credit is available for energy-efficient homes located in the U.S. and sold in 2006 or 2007. The $2,000 credit also applies to manufactured homes. For certain manufactured homes which only meet a 30% energy efficiency standard, a credit of $1,000 is available.

ENERGY EFFICIENT IMPROVEMENTS DEDUCTION

A maximum deduction of $1.80 per square foot of affected building space is available for the cost of major energy-saving improvements to commercial buildings. Qualifying property must be installed as part of interior lighting systems; heating, cooling, ventilation or hot water systems; or the building envelope, and must meet a 50% energy-reduction standard.

ENERGY EFFICIENT BUSINESS PROPERTY CREDIT

Businesses are eligible for several credits ranging from 10% to 30% for purchase or installation of qualifying property. These credits apply to solar energy property, and qualified fuel cell and microturbine power plants.

ENERGY EFFICIENT APPLIANCES

Manufacturers will get a credit for producing energy efficient appliances such as dishwashers, washing machines and refrigerators. There is no tax break for consumer purchases of energy efficient appliances; consumers can only hope that the manufacturers choose to pass along a price break.

HIGHWAY BILL

In July, Congress also passed the Safe, Accountable, Flexible and Efficient Transportation Equity Act of 2005 – commonly referred to as the Highway bill. This act primarily extends transportation or fuel related excise taxes and makes other changes to certain occupational taxes and exemptions from excise taxes.If you’re planning to make home improvements or buy a new vehicle, consider delaying until 2006 when the new credits take effect.

Online Tax Guide